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Digital Music Wholesaler Plans Public Offering

October 01, 2005|Charles Duhigg | Times Staff Writer

Digital Music Group Inc. has registered to raise as much as $36 million in an initial public offering that would make it one of the first independent digital music wholesalers to sell stock.

But the financials of the fledgling company, which provides digital music to Apple's iTunes Music Store, Wal-Mart Music and Yahoo Music, didn't strike much of a chord with some analysts. In the six months ended June 30, the firm lost $866,172 on revenue of $223,672, according to the Thursday filings.

"It appears to me there is a kernel of opportunity here, but it is premature to go public," said Phil Leigh, president of Inside Digital Media Inc. "They are running some serious risks."

Others agree, pointing to data compiled by Jupiter Research showing that sales of digital music only make up about 2% of the U.S. musical market. Observers note that Digital Music Group faces well-funded competitors, and that the major record labels, which own licenses for most of the music sold in the U.S., work directly with online stores rather than through wholesale distributors.

"Digital distribution is a very low-margin business," said David Pakman, managing director of a group that owns the Orchard, a competitor to Digital Music Group. "This market is growing quickly, but it certainly isn't mature. It's best to have repeated profitable quarters and to demonstrate real growth before taking anything to public investors."

Representatives of Sacramento-based Digital Music Group declined to comment.

Although the company said in filings that it had secured rights to sell more than 200,000 recordings in digital format, it also disclosed that thus far large retailers had agreed to sell only 17,000 of those.

According to Digital Music Group's filing, I-Bankers Securities Inc. is underwriting the company's offering, which is planned to trade on Nasdaq under the symbol DMGI. A representative of I-Bankers said the firm's entire sales staff was based in Italy.

Digital Music Group was created in April when executives from Digital Musicworks International and Rio Bravo Entertainment agreed to merge some assets. Neither company is well known in the digital marketplace. Digital Musicworks is headed by Mitchell Koulouris, a 13-year veteran of Tower Records who previously headed a company publishing computer magazines.

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